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Aurinia Pharmaceuticals Inc.
Consolidated Financial Statements
(Expressed in thousands of United States (U.S.) dollars)
First quarter ended March 31, 2015
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Financial Position
(Expressed in thousands of U.S. dollars)
| March 31, 2015 $ | December 31 2014 $ | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | 19,042 | 22,706 | ||||||
| Short term investment (note 4) | 9,999 | 9,998 | ||||||
| Accounts receivable | 114 | 92 | ||||||
| Prepaid expenses | 414 | 755 | ||||||
| 29,569 | 33,551 | |||||||
| Non-current assets | ||||||||
| Property and equipment | 51 | 52 | ||||||
| Acquired intellectual property and other intangible assets | 18,102 | 18,489 | ||||||
| Prepaid deposits | 286 | 286 | ||||||
| Total assets | 48,008 | 52,378 | ||||||
| Liabilities and Shareholders Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | 2,025 | 2,464 | ||||||
| Current portion of deferred revenue | 217 | 217 | ||||||
| Provision for restructuring costs | 155 | 155 | ||||||
| 2,397 | 2,836 | |||||||
| Non-current liabilities | ||||||||
| Deferred revenue | 792 | 847 | ||||||
| Provision for restructuring costs | 77 | 116 | ||||||
| Contingent consideration (note 5) | 3,657 | 3,473 | ||||||
| Derivative warrant liability (note 6) | 13,526 | 11,235 | ||||||
| 20,449 | 18,507 | |||||||
| Shareholders equity | ||||||||
| Share capital | ||||||||
| Common shares (note 7) | 260,926 | 259,712 | ||||||
| Warrants (note 7) | 1,662 | 1,804 | ||||||
| Contributed surplus | 13,523 | 12,306 | ||||||
| Accumulated other comprehensive loss | (805 | ) | (805 | ) | ||||
| Deficit | (247,747 | ) | (239,146 | ) | ||||
| Total shareholders equity | 27,559 | 33,871 | ||||||
| Total liabilities and shareholders equity | 48,008 | 52,378 |
Subsequent events (note 13)
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Operations and Comprehensive Loss
For the three month periods ended March
(Expressed in thousands
of U.S. dollars, except per share data)
| March 31, 2015 $ | March 31, 2014 $ (restated-note 2) | |||||||
| Revenue | ||||||||
| Licensing revenue | 30 | 30 | ||||||
| Research and development revenue | 25 | 25 | ||||||
| Contract services | 7 | 12 | ||||||
| 62 | 67 | |||||||
| Expenses | ||||||||
| Research and development | 3,330 | 1,040 | ||||||
| Corporate, administration and business development | 1,905 | 2,373 | ||||||
| Amortization of acquired intellectual property and other intangible assets | 392 | 359 | ||||||
| Amortization of property and equipment | 6 | 10 | ||||||
| Contract services | 5 | 8 | ||||||
| Other expense (note 8) | 3,025 | 483 | ||||||
| Restructuring costs | 569 | |||||||
| 8,663 | 4,842 | |||||||
| Net loss for the period | (8,601 | ) | (4,775 | ) | ||||
| Other comprehensive loss | ||||||||
| Item that will not be reclassified subsequently to loss | ||||||||
| Translation adjustment | (605 | ) | ||||||
| Comprehensive loss for the period | (8,601 | ) | (5,380 | ) | ||||
| Net loss per share (note 9) | ||||||||
| Basic and diluted net loss per common share | (0.27 | ) | (0.22 | ) |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Changes in Shareholders Equity
For the three month periods ended March
(Expressed in thousands
| Common Shares $ | Warrants $ | Contributed surplus $ | Accumulated Other Comprehensive Loss $ | Deficit $ | Shareholders Equity $ | |||||||||||||||||||
| Balance January 1, 2015 | 259,712 | 1,804 | 12,306 | (805 | ) | (239,146 | ) | 33,871 | ||||||||||||||||
| Exercise of warrants (note 7) | 427 | (142 | ) | 285 | ||||||||||||||||||||
| Exercise of cashless warrants | 636 | 636 | ||||||||||||||||||||||
| Exercise of stock options (note 7) | 151 | (67 | ) | 84 | ||||||||||||||||||||
| Stock-based compensation | 1,284 | 1,284 | ||||||||||||||||||||||
| Net loss for the period | (8,601 | ) | (8,601 | ) | ||||||||||||||||||||
| Balance March 31, 2015 | 260,926 | 1,662 | 13,523 | (805 | ) | (247,747 | ) | 27,559 | ||||||||||||||||
| Balance January 1, 2014 | 220,908 | 2,256 | 10,074 | (200 | ) | (219,725 | ) | 13,313 | ||||||||||||||||
| Comprehensive loss for the period | (605 | ) | (605 | ) | ||||||||||||||||||||
| Issue of units (note 7) | 40,059 | 40,059 | ||||||||||||||||||||||
| Share issue costs (note 7) | (2,844 | ) | (2,844 | ) | ||||||||||||||||||||
| Exercise of warrants (note 7) | 179 | (49 | ) | 130 | ||||||||||||||||||||
| Stock-based compensation | 1,298 | 1,298 | ||||||||||||||||||||||
| Net loss for the period | (4,775 | ) | (4,775 | ) | ||||||||||||||||||||
| Balance March 31, 2014 | 258,302 | 2,207 | 11,372 | (805 | ) | (224,500 | ) | 46,576 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Cash Flow
For the three month periods ended March
(Expressed in thousands
| March 31, 2015 $ | March 31, 2014 $ (restated-note 2) | |||||||
| Cash flow provided by (used in) | ||||||||
| Operating activities | ||||||||
| Net loss for the period | (8,601 | ) | (4,775 | ) | ||||
| Adjustments for: | ||||||||
| Amortization of deferred revenue | (55 | ) | (55 | ) | ||||
| Amortization of property and equipment | 6 | 10 | ||||||
| Amortization of acquired intellectual property and other intangible assets | 392 | 359 | ||||||
| Revaluation of contingent consideration | 184 | 533 | ||||||
| Loss (gain) on derivative warrant liability | 2,927 | (1,062 | ) | |||||
| Stock-based compensation | 1,284 | 1,298 | ||||||
| Change in provision for restructuring costs | (39 | ) | ||||||
| Share issue costs allocated to derivative warrant liability | 646 | |||||||
| Share issue costs allocated to warrant liability | 203 | |||||||
| Gain on disposal of property and equipment | (1 | ) | ||||||
| (3,902 | ) | (2,844 | ) | |||||
| Net change in other operating assets and liabilities (note 11) | (120 | ) | (2,510 | ) | ||||
| Net cash used in operating activities | (4,022 | ) | (5,354 | ) | ||||
| Investing activities | ||||||||
| Increase in short-term investment | (1 | ) | ||||||
| Purchase of equipment | (5 | ) | ||||||
| Proceeds on disposal of property and equipment | 1 | |||||||
| Capitalized patent costs | (5 | ) | (1 | ) | ||||
| Net cash used in investing activities | (11 | ) | ||||||
| Financing activities | ||||||||
| Proceeds from exercise of warrants | 285 | 130 | ||||||
| Proceeds from exercise of stock options | 84 | |||||||
| Proceeds from issuance of units | 52,000 | |||||||
| Share issue costs related to issuance of units | (3,693 | ) | ||||||
| Payment of financing milestone to ILJIN | (1,600 | ) | ||||||
| Net cash generated from financing activities | 369 | 46,837 | ||||||
| Effect of exchange rate adjustment on cash and cash equivalents | (15 | ) | ||||||
| Increase (decrease) in cash and cash equivalents | (3,664 | ) | 41,468 | |||||
| Cash and cash equivalents Beginning of period | 22,706 | 1,821 | ||||||
| Cash and cash equivalents End of period | 19,042 | 43,289 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
For the three month periods ended March
columns expressed in thousands of U.S. dollars)
Aurinia Pharmaceuticals Inc. or the Company is a clinical stage
pharmaceutical company with its head office located at #1203-4464 Markham Street, Victoria, British Columbia V8Z 7X8 where clinical, regulatory and business development functions of the Company are conducted. The Company has its registered office
located at #201, 17904-105 Avenue, Edmonton, Alberta T5S 2H5 where the finance function is performed.
Aurinia Pharmaceuticals Inc. is organized pursuant
to the Business Corporations Act (Alberta). The Company s Common Shares are currently listed and traded on the NASDAQ Global Market (NASDAQ) under the symbol AUPH and on the Toronto Stock Exchange under the symbol AUP. The Company s
primary business is the development of a therapeutic drug to treat autoimmune diseases, in particular lupus nephritis.
These interim condensed
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aurinia Pharma Corp., Aurinia Pharmaceuticals, Inc. (Delaware incorporated) and Aurinia Pharma Limited (UK incorporated).
These interim condensed consolidated financial statements were authorized for issue by the audit committee of the Board of Directors on May 5, 2015.
As described in note 6,
the Offering completed by the Company on February 14, 2014, resulted in the issuance of 4,729,843 warrants, exercisable for a period of five years from the date of issuance at an exercise price of $3.22 per warrant. The holders of the warrants
may elect, in lieu of exercising the warrants for cash, a cashless exercise option to receive common shares equal to the fair value of the warrants based on the number of warrants to be exercised multiplied by a five day weighted average market
price less the exercise price, with the difference divided by the weighted average market price. If a warrant holder exercises this option, there will be variability in the number of shares issued per warrant.
A review of the application of IFRS to these previously issued warrants has resulted in a revision of prior period comparatives for restatement of our
previous accounting for the warrants.
In accordance with IFRS, a contract to issue a variable number of shares fails to meet the definition of equity and
must instead be classified as a derivative liability and measured at fair value with changes in fair value recognized in the statement of operations and comprehensive loss at each period end. The derivative liability will ultimately be converted to
the Company s equity (common shares) when the warrants are exercised, or will be extinguished upon the expiry of the outstanding warrants, and will not result in the outlay of any cash by the Company.
In the original accounting determination, the estimated fair value of the warrants was recorded in equity at $10,418,000, offset by an allocation of issuance
costs of $739,000. At initial recognition the Company should have recorded the estimated fair value of the warrants as a derivative warrant liability at $9,107,000, with allocated issuance costs of $646,000 recognized as other expense. In addition,
at March 31, 2014, based on the trading price of the Company s shares at that time, the Company should have adjusted the estimated fair value of the derivative warrant liability to $8,045,000, resulting in a gain on revaluation of
derivative warrant liability in Other expense (income) for the three months ended March 31, 2014 of $1,062,000. At June 30, 2014, based on the trading price of the Company s shares at that time, the Company should have
adjusted the estimated fair value of the derivative warrant liability to $15,062,000, resulting in a loss on revaluation of derivative warrant liability of $7,017,000 in Other expense (income) for the three months ended June 30,
2014. At September 30, 2014, based on the trading price of the Company s shares at that time, the Company should have adjusted the estimated fair value of the derivative warrant liability to $9,794,000, resulting in a gain on revaluation
of derivative warrant liability of $5,268,000 in Other expense (income) for the three months ended September 30, 2014.
impact on cash from operating, financing or investing activities.
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
For the three month periods ended March
columns expressed in thousands of U.S. dollars)
The following table illustrates the impact of the correction for the relevant quarters:
| As at March 31, 2014 | ||||||||||||
| As previously reported $ | Adjustment $ | As revised $ | ||||||||||
| Derivative warrant liability | 8,045 | 8,045 | ||||||||||
| Equity | ||||||||||||
| Common shares | 257,084 | 1,218 | 258,302 | |||||||||
| Warrants | 11,886 | (9,679 | ) | 2,207 | ||||||||
| As at June 30, 2014 | ||||||||||||
| As previously reported $ | Adjustment $ | As revised $ | ||||||||||
| Derivative warrant liability | 15,062 | 15,062 | ||||||||||
| Equity | ||||||||||||
| Common shares | 257,131 | 1,218 | 258,349 | |||||||||
| Warrants | 11,873 | (9,679 | ) | 2,194 | ||||||||
| As at September 30, 2014 | ||||||||||||
| As previously reported $ | Adjustment $ | As revised $ | ||||||||||
| Derivative warrant liability | 9,794 | 9,794 | ||||||||||
| Equity | ||||||||||||
| Common shares | 257,790 | 1,218 | 259,008 | |||||||||
| Warrants | 11,691 | (9,679 | ) | 2,012 |
| Three months ended March 31, 2014 | ||||||||||||
| As previously reported $ | Adjustment $ | As revised $ | ||||||||||
| Other income (expense) | ||||||||||||
| Revaluation adjustment on derivative warrant liability | 1,062 | 1,062 | ||||||||||
| Share issue costs allocated to warrant liability | (646 | ) | (646 | ) | ||||||||
| Comprehensive loss | (5,796 | ) | 416 | (5,380 | ) | |||||||
| Basic and diluted net loss per common share | (0.24 | ) | (0.22 | ) |
| Three months ended June 30, 2014 | Six months ended June 30, 2014 | |||||||||||||||||||||||
| As previously reported $ | Adjustment $ | As revised $ | As previously reported $ | Adjustment $ | As revised $ | |||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Revaluation adjustment on derivative warrant liability | (7,017 | ) | (7,017 | ) | (5,955 | ) | (5,955 | ) | ||||||||||||||||
| Share issue costs allocated to warrant liability | (646 | ) | (646 | ) | ||||||||||||||||||||
| Comprehensive loss | (4,017 | ) | (7,017 | ) | (11,034 | ) | (9,813 | ) | (6,601 | ) | (16,414 | ) | ||||||||||||
| Basic and diluted net loss per common share | (0.13 | ) | (0.22 | ) | (0.35 | ) | (0.35 | ) | (0.24 | ) | (0.59 | ) |
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
For the three month periods ended March
columns expressed in thousands of U.S. dollars)
| Three months ended September 30, 2014 | Nine months ended September 30, 2014 | |||||||||||||||||||||||
| As previously reported $ | Adjustment $ | As revised $ | As previously reported $ | Adjustment $ | As revised $ | |||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Revaluation adjustment on derivative warrant liability | 5,268 | 5,268 | (687 | ) | (6,87 | ) | ||||||||||||||||||
| Share issue costs allocated to warrant liability | (646 | ) | (646 | ) | ||||||||||||||||||||
| Comprehensive income (loss) | (2,520 | ) | 5,268 | 2,748 | (12,333 | ) | (1,333 | ) | (13,666 | ) | ||||||||||||||
| Basic income (loss) per common share | (0.08 | ) | 0.17 | 0.09 | (0.41 | ) | (0.05 | ) | (0.46 | ) | ||||||||||||||
| Diluted income (loss) per common share | (0.08 | ) | 0.16 | 0.08 | (0.41 | ) | (0.05 | ) | (0.46 | ) |
These interim condensed consolidated financial statements of the Company have
been prepared in accordance with International Financial Reporting Standards ( IFRS ), as applicable to interim financial reports including IAS 34, Interim Financial Reporting, and should be read in conjunction with the annual restated
financial statements of the Company for the year ended December 31, 2014 which have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board ( IASB ), authorized for issue on May 15, 2015.
The short term investment, which is recorded at amortized cost is a HSBC Bank
U.S. denominated discount note with a face value of $10,010,000 and a cost of $9,999,000. The note, which was purchased on February 4, 2015 is due August 4, 2015 and has an effective interest rate of 0.218%.
The Company has recorded the fair value of contingent consideration payable to
ILJIN Life Science Co., Ltd. ( ILJIN ) resulting from the Arrangement Agreement completed on September 20, 2013 between the Company, Aurinia Pharma Corp. and ILJIN.
Contingent consideration includes potential payments of up to $10,000,000 to be paid in five equal tranches according to the achievement of pre-defined
clinical and marketing milestones.
The fair value of this portion of contingent consideration at March 31, 2015 was estimated to be $3,657,000
(December 31, 2014 - $3,473,000) and was determined by applying the income approach. The fair value estimates at March 31, 2015 were based on a discount rate of 10% and an assumed probability-adjusted payment range between 35% and 70%. This is
a level 3 recurring fair value measurement. There was no change in the assumptions since December 31, 2014.
On February 14, 2014, the Company completed a $52,000,000 private
placement (the Offering). Under the terms of the Offering, the Company issued 18,919,404 units (the Units) at a subscription price per Unit of $2.7485, each Unit consisting of one common share and one-quarter (0.25) of a common share purchase
warrant (a Warrant), exercisable for a period of five years from the date of issuance at an exercise price of $3.2204. The holders of the Warrants issued pursuant to the February 14, 2014 private placement may elect, in lieu of exercising the
Warrants for cash, a cashless exercise option to receive common shares equal to the fair value of the Warrants based on the number of Warrants to be exercised multiplied by a five day weighted average market price less the exercise price with the
difference divided by the weighted average market price. If a Warrant holder exercises this option, there will be variability in the number of shares issued per Warrant.
In accordance with IFRS, a contract to issue a variable number of shares fails to meet the definition of equity and must instead be classified as a derivative
liability and measured at fair value with changes in fair value recognized in the statement of operations and comprehensive loss at each period end. The derivative liability will ultimately be converted to the Company s equity (common shares)
when the Warrants are exercised, or will be extinguished upon the expiry of the outstanding Warrants, and will not result in the outlay of any cash by the Company.
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
For the three month periods ended March
columns expressed in thousands of U.S. dollars)
In the first quarter ended March 31, 2015, a holder of these Warrants elected this option and the
Company issued 66,000 common shares upon the cashless exercise of 182,000 Warrants. These Warrants had a fair value of $636,000 at the date of exercise, determined using the Black-Scholes warrant pricing model. This amount has been transferred from
derivative warrant liability to common shares.
At March 31, 2015 the Company recorded a derivative warrant liability at $13,526,000 (March 31, 2014